Mandatory Alternative Dispute Resolution under the New Building Code 2016?

Tuesday, 21 March 2017

As a consequence of the new Building Code 2016 coming into effect late last year1, there is now a live question as to whether many standard form contracts used in connection with Commonwealth funded construction projects require amending to include conclusive documented dispute resolution processes.

The Building and Construction Industry (Improving Productivity) Act 2016 (the Act) was passed and the associated Code for the Tendering and Performance of Building Work 2016 (the Building Code 2016) came into effect2 on 2 December 2016. The Act and the Building Code 2016 apply to all new tenders and tender submissions for Commonwealth funded building work arising after that date.

The new code included some late changes initiated by 'The Nick Xenophon Team' as part of their compromise to pass the bill. They required, amongst other things, improvements to payment practices in the construction industry, in part, by mandating effective dispute resolution procedures in construction contracts to secure timely payments to subcontractors.

New key provisions

The first relevant clause is 11D(1)(c) of the Building Code 2016 which requires there to be a:

"… documented dispute settlement process that details how disputes about payments to subcontractors will be resolved,…"

The Victorian Supreme Court of Appeal in SSC Plenty Road Pty Ltd v Construction Engineering (Aust) Pty Ltd3 considered what a "dispute settlement process" was, and is persuasive to suggest that a conclusive process with an actual resolution, not just an interim step such as mediation or non-binding expert determination, would be required to satisfy this requirement.

Clause 11E(1)(a) of the new code then goes further.  It requires that the "dispute settlement process":

"…includes a referral process to an independent adjudicator for determination if the dispute cannot be resolved between the parties, and must comply with that process and any determination …"

Whilst adding clarification, the requirement for a referral to an "independent adjudicator for determination" is a little confusing. The reference to an "adjudicator" is not defined.  It might, on a first reading, suggest an adjudicator within the meaning of the security of payment laws, but that does not seem to be a logical conclusion.

The security of payment regime remains available to contractors notwithstanding the new provisions due to prohibitions against contracting out of those laws in each State and Territory. The new changes would effectively be redundant which seems to defeat their purpose and to be an unlikely interpretation.  Also, the likely requirement for the process to be conclusive suggests against a security of payment reference as a key premise of those regimes is an interim payment process only.

Similarly, the new clauses do not seem intended to reserve a right to take court proceedings, assuming such an avenue was excluded by the contracted dispute resolution clause. The reference to an "adjudicator" would be an unusual way to refer to a judge and, if that was intended, the more common and clear expression would be exactly that.  Although, to be precise, a judge would probably fall within the category of an "adjudicator" on the ordinary definition of the term.

It seems more likely that the reference to an "adjudicator" is to something else; a general reference to an official decision maker whether that be as an arbitrator or an expert but without being that prescriptive. It could also be a reference to a superintendent or an independent certifier, assuming the requirement of "independent" could be satisfied bearing in mind that those parties are sometimes chosen or paid for by the principal.  It could also refer to a binding conciliation process.

What does this all mean?

While it is not entirely clear, it seems more likely than not that the new code's underlying intent is to introduce a mandatory dispute resolution process that is something different from court proceedings and adjudication under security of payment laws but which must still be submitted to an "adjudicator" and be conclusive.

If a party fails to comply with Building Code 2016 (including mandatory self-declaration under clause 17), the Commissioner may refer a complaint to the Minister with recommendations including to exclude the entity from tendering for, or being awarded, Commonwealth funded building work for a period of up to 1 year in duration.

Taking into consideration these potentially serious consequences, to avoid a risk of breaching the code requirements, we recommend that parties to a contract seeking to comply with the new Building Code 2016 consider including a dispute resolution process which has as its end point, however circuitously reached, a binding expert determination, arbitration or equally conclusive and alternative process.

This article was written by Lucas Keogh, Partner.

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1See recent commentary by John Nikolic, 'ABCC Mark II - So What's New?' (2017) 172 Australian Construction Law Newsletter, p28.

2While currently in force, as noted by Nikolic (see above at p30), the Building Code 2016 may still be disallowed or amended early in 2017.

3[2016] VSCA 119.

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For further information please contact:

Paul Deschamps
Partner | Sydney
P +61 2 9334 8516
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Paul Gordon
Partner | Brisbane
P +61 7 3002 6794
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Paul Graham
Partner | Melbourne
P +61 3 8644 3575
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Colin Harris
Partner | Brisbane
P +61 7 3169 4822
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Michael Hollingdale
Partner | Perth
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David Jury
Partner | Sydney
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Theo Kalyvas
Partner | Melbourne
P +61 3 8644 3573
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Lucas Keogh
Partner | Sydney
P +61 2 9334 8821
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Sonya Kroon
Partner | Sydney
P +61 2 9334 8839
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Karyn Reardon
Partner | Brisbane
P +61 7 3002 6799
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Mark Riddington
Partner | Sydney
P +61 2 9334 8566
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Michael Tuckfield
Partner | Melbourne
P +61 3 8644 3678
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David Vaughan
Partner | Sydney
P +61 2 9334 8610
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Ross Williams
Partner | Brisbane
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Important disclaimer: The material contained in this publication is of a general nature only and is based on the law as at 21 March 2017. It is not, nor is intended to be, legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.